Thursday, March 17, 2016

50th AIM Equity Update by Wenting (Mavis) Peng. Westpac Banking Corporation (WBK) "As Commodity Prices Rise, WBK Looks to Gain"

WBK (Westpac Banking Corporation): "Still in a good shape!"
By: Wenting (Mavis) Peng, student at Marquette University
 Image result for westpac 
 Disclosure: The AIM Equity Fund currently holds this position. This article was written by myself, and it expresses my own opinions. I am not receiving compensation for it and I have no business relationship with any company whose stock is mentioned in this article.

Westpac Banking Corporation (New York: WBK) one of the four major banks in Australia and one of the largest banks in New Zealand. It offers diversified banking and financial services.  

WBK’s capital still remains in a sector leading position. CET1 ratio is 10.2%.

WBK is seeing a solid asset quality, suggesting that it has good potential in both short-term and long-term.

• Broad portfolio of services and products and strong parent backing will help Westpac maintain its strong market position for the long-term.

• More opportunities in Australian market. (Cards & payments, insurance industry, and mobile banking)

Key Points: In the first quarter of year 2016, Westpac Banking Corporation has CET1 ratio of 10.2%, which increased 70 bps compared to last September. 3.5 billion Australian dollars entitlement offer were signed in 2015. Looking forward to 2016, Westpac is expected to remain the sector leading position through its organic earnings. Moreover, the company puts a lot of efforts on lowering the cost. The recent commitment to delivering cost growth below 3% will also benefit the company.

The impaired corporate loans in Westpac decreased by $68 million in the first quarter of year 2016 and at the same time, the actual losses further declined by $41 million from last quarter. Additionally, the impaired residential mortgages also decreased by $15 million while 3 month actual losses were $3 million lower than the previous quarter.

Westpac Banking Corporation has a very unique and diversified product and business mix and a high quality business model, helping WBK meet broader customer demands and requirements. Westpac offers a wide range of financial products and service to not only individual clients but also business and corporate customers. Westpac already launched a plan to develop its specialty in Internet banking, mobile banking, phone banking, and merging lending. In addition, Westpac serves over 12 million customers through operating through its broad network of branches in the major financial centers such as London, Hong Kong, New York and Singapore. In a word, the diversified global specialized platform with a strong parent backing will continue to contribute to WBK’s reputation as the industry leading company with strong market position.

Westpac announced that it would continue to expend geographically and exploit its exposures to wealth management and insurance services.

Does the company have great opportunity?
The potential cards & payment market, growing Australian insurance industry, and the mobile banking will provide significant opportunity for Westpac. Firstly, the growing cards and payments market in Australia is more likely to drive the demand for Westpac Banking offerings. According to recently research, the Australian market for cards and payments is estimated to grow at a CAGR of 3.2% and expected to reach 115.7 million in 2017. 

Westpac also stands to benefit from the growing Australian insurance industry that supported by rise in motor vehicles sales, growth of e-commerce to support non-life segment as well as the growth in aging population in Australia. For example, the written premium of Australian insurance industry is expected to increased at 4.2% CAGR, reaching $107.9 billion in 2018.

How’s the Stock Performance Recently?
We bought this stock at a price of $22.93; the current price of Westpac Banking Corporation is $24.36, up 6%. The stock is nonetheless on the bargain table with a relatively low price to book value of 2 times. Moreover, WBK also paid $1.37 dividend, giving you an impressive 5.69% yield.

Source: FactSet     
My Takeaway

Westpac Banking Corporation has very strong market position and potential to grow in the long-term perspective. The company’s management are also confident about WBK ‘s stock performance in the following year because the strategic focus on mobile banking will provide the banking experience easier and much quicker for the customers, in turn attracting new customer base and its top-line performance. I firmly believe WBK will maintain its strong profit performance by expanding and diversifying its platform, products, and network expansions. All these will drive a high price for WBK sooner. 

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